UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM
(Mark one)
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For
the quarterly period ended
OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from __________ to __________.
Commission
File Number:
(Exact name of registrant as specified in its charter)
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(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
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| (Address of principal executive offices) | (Zip Code) |
(Registrant’s telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year, if changed since last report)
Indicate
by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. ☒
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule
405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
was required to submit such files). ☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large Accelerated filer | ☐ | Accelerated filer | ☐ |
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☐ | Smaller Reporting Company |
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| Emerging Growth Company |
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If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒
As of February 19, 2024, shares of common stock were issued and outstanding.
Securities registered pursuant to Section 12(b) of the Act: None
Forward-Looking Statements
This Current Report on Form 10-Q (the “Report”) contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that involve substantial risks and uncertainties. The forward-looking statements are contained in this Report in some cases you can identify forward-looking statements by terminology such as “may”, “is expected to”, “anticipates”, “estimates”, “intends”, “plans”, “projection”, “could”, “vision”, “goals”, “objective” and “outlook” and similar expressions. These statements are not historical facts and may be forward-looking and may involve estimates, assumptions and uncertainties which could cause actual results or outcomes to differ materially from those expressed in the forward-looking statements, many of which are difficult to predict and generally beyond our control.
You should refer to “Risk Factors” of this Report for a discussion of important factors that may cause our actual results to differ materially from those expressed or implied by our forward-looking statements. As a result of these factors, we cannot assure you that the forward-looking statements in this Report will prove to be accurate. Furthermore, if our forward-looking statements prove to be inaccurate, the inaccuracy may be material. In light of the significant uncertainties in these forward-looking statements, you should not regard these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified time frame, or at all. We do not undertake any obligation to update any forward-looking statements. Unless the context requires otherwise, references to “we,” “us,” “our,” and “Company,” refer to registrant, ZRCN Inc. (“ZRCN” - formerly known as Harmony Energy Technologies Corporation (“Harmony”)) and/or ZRCN’s wholly owned subsidiary, Zircon Corporation (“Zircon”).
Our forward-looking statements are subject to a number of known and unknown risks, uncertainties, assumptions, and other factors that may cause our actual future results, performance, or achievements to differ materially from any future results expressed or implied in this Report. Reported results should not be considered an indication of future performance.
Because some of these risks and uncertainties cannot be predicted or quantified and some are beyond our control, you should not rely on our forward-looking statements as predictions of future events. More information about potential risks and uncertainties that could affect our business and financial results is included in the section of this Annual Report titled “Risk Factors” and our other filings with the U.S. Securities and Exchange Commission (“SEC”), which are available on the SEC’s web site at www.sec.gov . Moreover, we operate in a very competitive and rapidly changing environment; new risks and uncertainties may emerge from time to time, and it is not possible for us to predict all risks nor identify all uncertainties. The events and circumstances reflected in our forward-looking statements might not be achieved and actual results could differ materially from those projected in the forward-looking statements. Except as otherwise noted, all forward-looking statements are made as of the date we file this Report, and are based on information and estimates available to us at this time. Although we believe that the expectations reflected in our forward-looking statements are reasonable, we cannot guarantee future results, performance, or achievements. Except as required by law, we assume no obligation to update any of the statements in this Report whether as a result of any new information, future events, changed circumstances, or otherwise. You should read this Report with the understanding that our actual future results, performance, events, and circumstances might be materially different from what we expect.
Table of Contents
| 2 |
PART I FINANCIAL INFORMATION
ITEM 1. Financial Statements.
ZRCN Inc.
CONSOLIDATED BALANCE SHEETS
| December 31, 2023 | March 31, 2023 | |||||||
| (Unaudited) | (Audited) | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash | $ |
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$ |
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Accounts receivable, net of allowance for doubtful accounts of approximately $
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| Inventory, net |
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| Prepaid expenses and other assets |
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| Total current assets |
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| Property and equipment, net |
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| Operating lease right-of-use assets, net |
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| Federal tax deposit |
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| Intangible assets, net |
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| Deposits |
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| Total assets | $ |
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$ |
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| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities: | ||||||||
| Line of credit | $ |
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$ |
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| Accounts payable |
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| Accrued expenses |
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| Notes payable, current portion |
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| Operating lease liability, current |
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| Total current liabilities |
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| Notes payable, net of current portion |
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| Operating lease liability, net of current portion |
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| Notes payable to Stauss Family Administrative Trust |
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| Total liabilities |
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| Commitments and Contingencies (Note 12) | ||||||||
| Stockholders’ equity: | ||||||||
| Common stock; at $ par value, shares authorized, and shares issued and outstanding as of December 31, 2023 and March 31, 2023 |
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| Accumulated other comprehensive income |
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| Note receivable from stockholder |
(
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| Retained earnings |
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| Total equity attributable to ZRCN |
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| Non-controlling interests in variable interest entities |
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| Total stockholders’ equity |
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| Total liabilities and stockholders’ equity | $ |
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$ |
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The accompanying condensed notes are an integral part of these unaudited consolidated financial statements.
| 3 |
ZRCN Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(Unaudited)
| For the Three Months Ended December 31, | For the Nine Months Ended December 31, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| (Unaudited) | (Unaudited) | |||||||||||||||
| Net sales | $ |
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$ |
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$ |
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$ |
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| Cost of sales |
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| Gross profit |
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| Operating expenses: | ||||||||||||||||
| General and administrative |
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| Marketing and selling |
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| Research and development |
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| Total operating expenses |
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| Income (loss) from operations |
(
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| Other expenses: | ||||||||||||||||
| Interest expense |
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| Other expenses |
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| Loss on foreign currency transactions |
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| Total other expenses |
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| Income (loss) before income taxes |
(
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| Income tax expense |
(
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(
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(
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(
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| Net income (loss) | $ |
(
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) | $ |
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$ |
(
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) | $ |
(
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| Less: Net income (loss) attributable to non-controlling interests |
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(
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(
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| Net income (loss) attributable to common stockholders | $ |
(
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$ |
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$ |
(
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| Net income (loss) | $ |
(
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) | $ |
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$ |
(
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(
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| Change in foreign currency translation adjustment |
(
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(
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(
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| Comprehensive income (loss) |
(
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(
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| Less: Net (loss) income attributable to non-controlling interests |
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(
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| Less: Other comprehensive income (loss) attributable to noncontrolling interest |
(
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(
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(
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| Comprehensive income (loss) attributable to ZRCN common stockholders | $ |
(
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) | $ |
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$ |
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$ |
(
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| Net income (loss) per share: | ||||||||||||||||
| Basic | $ |
(
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$ |
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$ |
(
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| Diluted | $ |
(
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$ |
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$ |
(
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| Weighted average common shares outstanding: | ||||||||||||||||
| Basic |
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| Diluted |
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The accompanying condensed notes are an integral part of these unaudited consolidated financial statements.
| 4 |
ZRCN Inc.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Unaudited)
| Common Stock | Accumulated Other Comprehensive | Note Receivable from | Retained | Total Equity Attributable | Non-controlling | Total Stockholders’ | ||||||||||||||||||||||||||
| Shares | Amount | Income | Stockholder | Earnings | to ZRCN | Interests | Equity | |||||||||||||||||||||||||
| Balance – March 31, 2023 |
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$ |
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$ |
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$ |
(
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$ |
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$ |
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$ |
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| Merger with Harmony |
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(
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(
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| Change in foreign currency translation adjustment | — |
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| Net loss | — |
(
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(
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(
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(
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| Balance – June 30, 2023 |
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$ |
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$ |
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$ |
(
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) | $ |
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$ |
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$ |
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$ |
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| Change in foreign currency translation adjustment | — |
(
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(
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(
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| Repayment of Note Receivable from Stockholder | — |
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| Net income (loss) | — |
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(
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| Balance – September 30, 2023 |
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$ |
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$ |
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$ | $ |
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$ |
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$ |
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$ |
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| Change in foreign currency translation adjustment | — |
(
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(
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(
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| Net income (loss) | — |
(
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(
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(
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| Balance – December 31, 2023 |
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$ |
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$ |
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$ | $ |
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$ |
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$ |
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$ |
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| Common Stock | Accumulated Other Comprehensive | Note Receivable from | Retained | Total Equity Attributable | Non-controlling | Total Stockholders’ | ||||||||||||||||||||||||||
| Shares | Amount | Income | Stockholder | Earnings | to ZRCN | Interests | Equity | |||||||||||||||||||||||||
| Balance – March 31, 2022 |
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$ |
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$ |
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$ |
(
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) | $ |
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$ |
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$ |
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$ |
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| Stockholder distributions | — |
(
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(
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(
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| Change in foreign currency translation adjustment | — |
(
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) |
(
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(
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| Net income (loss) | — |
(
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(
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(
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| Balance – June 30, 2022 |
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$ |
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$ |
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$ |
(
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) | $ |
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$ |
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$ |
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$ |
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| Change in foreign currency translation adjustment | — |
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| Net income | — |
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| Balance – September 30, 2022 |
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$ |
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$ |
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$ |
(
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) | $ |
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$ |
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$ |
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$ |
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| Change in foreign currency translation adjustment | — |
(
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) |
(
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(
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| Net income (loss) | — |
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(
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) |
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| Balance – December 31 2022 |
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$ |
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$ |
(
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) | $ |
(
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) | $ |
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$ |
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$ |
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$ |
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The accompanying condensed notes are an integral part of these unaudited consolidated financial statements.
| 5 |
ZRCN Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| For the Nine Months Ended December 31, | ||||||||
| 2023 | 2022 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net loss | $ |
(
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) | $ |
(
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| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | ||||||||
| Depreciation expense |
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| Amortization of intangible assets |
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| Amortization of right-of-use assets |
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| Impairment of intangible assets |
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| Bad debt expense |
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| Loss on foreign currency transactions |
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| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable, net |
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| Inventory, net |
(
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| Prepaid expenses and other assets |
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| Federal tax deposit |
(
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(
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| Accounts payable |
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(
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| Accrued expenses and other current liabilities |
(
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| Operating lease liabilities |
(
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| Net cash provided by operating activities |
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| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
| Effect of Harmony Merger, net of cash acquired |
(
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| Investment in intangible assets |
(
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(
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| Purchase of property and equipment |
(
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(
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| Net cash used in investing activities |
(
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(
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| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
| Repayment of notes payable |
(
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(
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| Repayment of debt assumed in Harmony Merger |
(
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| Distributions to stockholders |
(
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| Borrowing on line of credit |
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| Repayment on line of credit |
(
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(
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| Net cash provided by (used in) financing activities |
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(
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| Effect of exchange rate fluctuations on cash |
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(
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| Net increase in cash |
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| Cash at beginning of period |
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| Cash at end of period | $ |
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$ |
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| Supplemental disclosure of cash flow information: | ||||||||
| Cash paid for interest | $ |
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$ |
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| Cash paid for taxes | $ |
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$ |
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| Noncash investing and financing activities: | ||||||||
| Common stock issued in connection with Harmony merger | $ |
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$ | |||||
| Fair value of Advisor Warrants issued to effectuate Harmony Merger | $ |
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$ | |||||
| Assets acquired in Harmony Merger | $ |
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$ | |||||
| Liabilities assumed in Harmony Merger | $ |
(
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) | $ | ||||
| Noncash settlement of Stauss note payable for settlement of note receivable from stockholder | $ |
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$ | |||||
The accompanying condensed notes are an integral part of these unaudited consolidated financial statements.
| 6 |
ZRCN Inc.
CONDENSED NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED DECEMBER 31, 2023 AND 2022
1. Organization
The Business
On April 14, 2023 (the “Closing Date”), Zircon Corporation (“Zircon”) effectuated a merger and reorganization with Harmony Energy Technologies, Inc. (“Harmony”), a Delaware Corporation, ZRCN Inc., a California corporation and a wholly owned subsidiary of Harmony (the “Merger Sub”); and Zircon. The merger leverages Zircon’s sensor-based, ASIC (“Application-Specific Integrated Circuits”) processor technology and patent portfolio, to accelerate growth in its product lines and global markets as a publicly traded company. The combination of Harmony and Zircon was effectuated through a merger (the “Merger”) of Merger Sub into Zircon. The separate existence of Merger Sub ceased, and Merger Sub was merged with and into Zircon (Zircon, as the surviving corporation following the Merger). Upon completion of the Merger, Harmony changed its name to ZRCN Inc. (“ZRCN” or the “Company”). While Harmony was the legal acquirer of Zircon in the Merger, the Merger is treated as a reverse recapitalization, whereby Zircon is deemed to be the accounting acquirer, and the historical financial statements of Zircon became the historical financial statements of Harmony (renamed ZRCN Inc.) upon the closing of the Merger. Under this method of accounting, Harmony was treated as the “acquired” company and Zircon is treated as the acquirer for financial reporting purposes.
Accordingly, for accounting purposes, the Merger was treated as the equivalent of Zircon issuing stock for the net assets of Harmony, accompanied by a recapitalization. The net assets of Harmony were stated at historical cost, with no goodwill or other intangible assets recorded.
Zircon was incorporated in California in 1977. The Company, through Zircon, is principally engaged in the design and manufacture of electronic-based consumer hardware and sells its products primarily to retail outlets located throughout the United States, Canada, Japan and Europe. The Company and Zircon operate from their headquarters located in Campbell, California and an affiliate entity of Zircon, Zircon de Mexico S.A. de C.V., located in Ensenada, Mexico. The operations of the Company and Zircon are supported also by an affiliated entity of Zircon, Zircon Corporation Limited, located in the United Kingdom.
2. Liquidity
As
of December 31, 2023, the Company had $
3. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited consolidated financial statements and related disclosures have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) applicable to interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation of the Company and its subsidiaries’ financial position and interim results as of and for the periods presented have been included. All such adjustments are of a normal recurring nature unless disclosed otherwise. Results for interim periods are not necessarily indicative of those that may be expected for a full year.
The financial information included herein should be read in conjunction with our audited consolidated financial statements and related notes included in our Annual Report for the year ended March 31, 2023, in our Form 8-K/A.
The merger between Harmony’s wholly owned subsidiary and Zircon was accounted for as a reverse asset acquisition in accordance with GAAP. Under this method of accounting, Harmony, through its merger subsidiary, was treated as the “acquired” company and Zircon was treated as the acquirer for financial reporting purposes.
The consolidated assets, liabilities and results of operations prior to the merger are those of Zircon. Refer to Note 4 for additional information on the transaction.
| 7 |
ZRCN Inc.
CONDENSED NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED DECEMBER 31, 2023 AND 2022
Principles of Consolidation
The accompanying unaudited consolidated financial statements include the accounts of ZRCN as well as its variable interest entities. The Company consolidates all entities over which the Company has the power to govern the financial and operating policies and therefore exercises control, and upon which the Company has a controlling financial interest. The entities are consolidated from the date at which the Company obtains control and are de-consolidated from the date at which control ceases. All intercompany balances and transactions have been eliminated. Accounting policies of the entities have been revised where necessary to ensure consistency with the policies adopted by the Company.
Under Accounting Standards Codification (“ASC”) Topic 810-10-25, Consolidation , Zircon de Mexico S.A. de C.V. (“ZDM”) and Zircon Corporation Limited (“Zircon UK”) have been determined to be variable interest entities with Zircon as the primary beneficiary. Therefore, the financial statements of ZDM and Zircon UK are consolidated with Zircon and the Company, and all significant intercompany transactions and balances have been eliminated.
Reverse Stock Split
On
May 10, 2023, ZRCN authorized a
Variable Interest Entities
In accordance with ASC 810, Consolidation (“ASC 810”), the Company assesses whether it has an explicit or implicit variable interest in legal entities in which it has a financial relationship and, if so, whether or not those entities are variable interest entities (“VIEs”). Variable interests are contractual, ownership, or other pecuniary interests in an entity whose value changes with changes in the fair value of the entity’s net assets, exclusive of variable interests. Explicit variable interests are those which directly absorb the variability of a VIE and can include contractual interests such as loans or guarantees as well as equity investments. An implicit variable interest acts the same as an explicit variable interest except it involves the absorbing of variability indirectly, such as through related party arrangements or implicit guarantees. The analysis includes consideration of the design of the entity, its organizational structure, including decision making ability over the activities that most significantly impact the VIE’s economic performance. For those entities that qualify as VIEs, ASC 810 requires the Company to determine if the Company is the primary beneficiary of the VIE, and if so, to consolidate the VIE.
If an entity is determined to be a VIE, the Company evaluates whether the Company is the primary beneficiary. The primary beneficiary analysis is a qualitative analysis based on power and economics. The Company consolidates a VIE if both power and benefits belong to the Company - that is, the Company (i) has the power to direct the activities of a VIE that most significantly influence the VIE’s economic performance (power), and (ii) has the obligation to absorb losses of, or the right to receive benefits from, the VIE that could potentially be significant to the VIE (benefits). The Company consolidates VIEs whenever it is determined that the Company is the primary beneficiary.
The Company has determined that ZDM and Zircon UK are variable interest entities with the Company’s wholly owned subsidiary, Zircon, as the primary beneficiary, and thus the Company, with the ability to exercise control, as determined under the guidance of ASC 810. In its determination, management considered the following qualitative and quantitative factors:
| a. | the overall purpose and design of the entities, which exist primarily for the benefit of or on behalf of the Company and |
| 8 |
ZRCN Inc.
CONDENSED NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED DECEMBER 31, 2023 AND 2022
| b. | the Company’s contractual and common control arrangements with the VIEs, through which it gains both the power to direct the activities that most significantly impact their economic performance, and the obligation to absorb losses and receive benefits that potentially could be significant to the VIEs. | |
| c. | the equity at risk of the entities is not sufficient to finance the entities’ activities without additional subordinated financial support by the Company (i.e., the entities are thinly capitalized). |
Non-controlling Interests
The Company follows ASC 810, which governs the accounting for and reporting of non-controlling interests (“NCIs”) in partially owned consolidated entities and the loss of control of those entities. Non-controlling interest positions, which represent 100% of the activity in the Company’s consolidated entities after intercompany transactions have been eliminated, are reported as a separate component of consolidated stockholders’ equity from the equity attributable to ZRCN’s stockholders for all years presented. The net income attributed to the NCI’s is separately designated in the accompanying unaudited consolidated statements of operations and comprehensive income (loss).
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported amounts of revenues and expenses. Significant estimates used in preparing these unaudited consolidated financial statements include the allowance for doubtful accounts, allowance for inventory obsolescence, allocation of overhead to inventory, estimated future benefit and fair value of intangible assets, accrued rebates and advertising allowances, useful lives and depreciation methods of property and equipment, and uncertain tax positions. It is at least reasonably possible that the significant estimates used will change within the next year.
Cash
The
carrying value of cash approximates fair value due to the short-term nature of the instruments. From time to time, the Company may be
in the position of a “book overdraft” in which outstanding checks exceed cash. The Company classifies book overdrafts in
accounts payable within its unaudited consolidated balance sheets, and classifies the change in accounts payable associated
with book overdrafts as an operating activity within its unaudited consolidated statements of cash flows. As of December 31,
2023, the book overdraft included within accounts payable was $
Accounts Receivable, Net
The Company provides credit without requiring collateral, in the normal course of business, to credit-worthy customers as determined by management’s review of references and credit reports. Bad debts are charged against the allowance for doubtful accounts. The allowance is adjusted to provide a specific and general allowance for estimated uncollectible accounts, which is based on management’s judgment. Balances that are still outstanding after management has used reasonable collection efforts are written off through a charge to the valuation allowance and a credit to accounts receivable. Based on management’s assessment of the credit history with customers having outstanding balances and current relationships with them, management believes that losses on balances outstanding will not exceed the allowance.
Accounts receivable consisted of the following:
| December 31, 2023 | March 31, 2023 | |||||||
| Accounts receivable | $ |
|
$ |
|
||||
| Less allowance for doubtful accounts |
(
|
) |
(
|
) | ||||
| Accounts receivable, net | $ |
|
$ |
|
||||
| 9 |
ZRCN Inc.
CONDENSED NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED DECEMBER 31, 2023 AND 2022
Activity related to the Company’s allowance for doubtful accounts was as follows:
| December 31, 2023 | March 31, 2023 | |||||||
| Balance, beginning of period | $ |
|
$ |
|
||||
| Increase/(decrease) in bad debt allowance |
|
(
|
) | |||||
| Write-offs |
(
|
) | ||||||
| Balance, end of period | $ |
|
$ |
|
||||
Inventory, Net
Inventories,
which consist primarily of raw materials and finished goods, are stated at the lower of cost or net realizable value. The Company states
inventory cost utilizing the first-in, first-out
(FIFO) method. Labor and overhead associated with
inventory purchases are estimated and capitalized in inventory. The need for an allowance for inventory obsolescence is based on an evaluation
of slow-moving or obsolete inventory. Obsolescence allowance was estimated at $
Revenue Recognition
The Company’s revenues result from the sale of products and reflect the consideration to which the Company expects to be entitled. The Company records revenue based on a five-step model in accordance with ASC 606, Revenue from Contracts with Customers (“ASC 606”). For its contracts with customers, the Company identifies the performance obligations (goods or services), determines the transaction price, allocates the contract transaction price to the performance obligations, and recognizes the revenue when (or as) the performance obligation is transferred to the customer. A good or service is transferred when (or as) the customer obtains control of that good or service. The Company satisfies its performance obligation and recognizes revenue at the time the customer obtains the rights to the product, which is generally when goods are shipped. As a result, the majority of the Company’s revenue is recognized at a point in time.
Provisions for customer volume rebates, product returns, discounts and allowances are variable consideration and are recorded as a reduction of revenue in the same period the related sales are recorded. Such provisions are calculated using historical averages adjusted for any expected changes due to current business conditions. Consideration given to customers for cooperative advertising is recognized as a reduction of revenue except to the extent that there is a distinct good or service and evidence of the fair value of the advertising, in which case the expense is classified as selling, general, and administrative expense. Sales tax for the sale of products is applied to the invoice and recorded as an accrued liability.
Research and Development
The Company incurs research and development costs of products for use in scanning behind opaque surfaces. The Company will continue to invest in research and development to develop additional components and products of its scanning product offerings and remains committed to providing its customers and partners with best-in-class scanning products and services. Such research and development costs, software development costs, and any new product development costs, are expensed as incurred, and include personnel-related costs, depreciation related to engineering and test equipment, allocated costs of facilities and information technology, outside services and consultant costs, supplies, software tools and product certification.
Comprehensive Income (Loss)
Comprehensive income (loss) of all periods presented is comprised primarily of net income (loss) and foreign currency translation adjustments.
| 10 |
ZRCN Inc.
CONDENSED NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED DECEMBER 31, 2023 AND 2022
Segment Reporting
The Company determines its reporting units in accordance with FASB ASC 280, Segment Reporting (“ASC 280”). The Company evaluates a reporting segment by first identifying its operating segments under ASC 280. Operating segments are defined as components of an enterprise about which separate financial information is evaluated regularly by the chief operating decision maker (“CODM”) to allocate resources and assess performance. The Company defines its CODM to be its president and chief operating officer. The Company then evaluates each operating segment to determine if it includes one or more components that constitute a business. If there are components within an operating segment that meet the definition of a business, the Company evaluates those components to determine if they must be aggregated into one or more reporting units. If applicable, when determining if it is appropriate to aggregate different operating segments, the Company determines if the segments are economically similar and, if so, the operating segments are aggregated. The president and chief operating officer reviews the financial information presented on a consolidated basis for purposes of making operating decisions, allocating resources, and evaluating the Company’s financial performance. The Company has one operating segment and therefore one reporting segment. Management reviews its business as a consolidated segment, using financial and other information rendered meaningful only by the fact that such information is presented and reviewed in the aggregate.
Concentration of Business and Credit Risk
As of December 31, 2023, the Company maintained deposits in a single bank that exceeded the federal insured deposit limit of the Federal Deposit Insurance Corporation (FDIC).
During
the three months ended December 31, 2023 and 2022 the Company generated approximately
For
the for the nine months ended December 31, 2023 and March 31, 2023,
Fair Value of Financial Instruments
In accordance with FASB ASC 820 Fair Value Measurements and Disclosures , the Company uses a three-level hierarchy for fair value measurements of certain assets and liabilities for financial reporting purposes that distinguishes between market participant assumptions developed from market data obtained from outside sources (observable inputs) and our own assumptions about market participant assumptions developed from the best information available to us in the circumstances (unobservable inputs). The fair value hierarchy is divided into three levels based on the source of inputs as follows:
| a. | Level 1 – inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets; | |
| b. | Level 2 – inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability other than quoted prices, either directly or indirectly including inputs in markets that are not considered to be active; and | |
| c. | Level 3 – inputs to the valuation methodology are unobservable and insignificant to the fair value measurement. |
Categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The Company believes the carrying amounts of its cash equivalents, accounts receivable, other current assets, other assets, accounts payable, accrued expenses, and other current liabilities approximated their fair values as of December 31, 2023 and March 31, 2023 due to their short-term nature. Management measures intangible assets at fair value on a non-recurring basis using internally developed assumptions about the market as there is no market activity available. All carrying amounts of other applicable assets and liabilities on the Company’s balance sheet approximate fair value. For long-term debt, the estimated fair value approximates its carrying value, as the interest rate is in line with the market interest rates for this type of debt.
Income Taxes
Income taxes are recorded in accordance with ASC 740, Income Taxes (“ASC 740”), which provides for deferred taxes using an asset and liability approach. The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Valuation allowances are provided, if based upon the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. The Company accounts for uncertain tax positions in accordance with the provisions of ASC 740. When uncertain tax positions exist, the Company recognizes the tax benefit of tax positions to the extent that the benefit would more likely than not be realized assuming examination by the taxing authority. The determination as to whether the tax benefit will more likely than not be realized is based upon the technical merits of the tax position as well as consideration of the available facts and circumstances. Management believes estimates related to income tax uncertainties are appropriate based on current facts and circumstances. The Company’s conclusions regarding uncertain tax positions may be subject to review and adjustment at a later date based upon ongoing analyses of tax laws, regulations and interpretations thereof, as well as, other factors. Any interest and penalties related to income tax matters are classified as a component of income tax expense.
| 11 |
ZRCN Inc.
CONDENSED NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED DECEMBER 31, 2023 AND 2022
As of April 14, 2023, the Zircon’s election to be an S Corporation under the Internal Revenue Code was no longer in effect.
Basic net income (loss) per share of common stock is computed by dividing net income or loss attributable to ZRCN by the weighted average number of shares of common stock outstanding for the period. Diluted loss per share excludes, when applicable, the potential impact of common stock warrant shares and other dilutive instruments because their effect would be anti-dilutive. Diluted net income per share, when applicable, includes the warrant shares because their effect would be dilutive. The dilutive securities outstanding are as follows:
| December 31, 2023 | December 31, 2022 | |||||||
| Common stock warrants |
|
|||||||
Leases
In February 2016, the FASB issued a new accounting standard, ASC Topic 842, related to leases to increase transparency and comparability among organizations by requiring the recognition of right-of-use (“ROU”) assets and lease liabilities on the balance sheet. Most significant among the changes in the standard is the recognition of ROU assets and lease liabilities by lessees for those leases classified as operating leases under previous U.S. GAAP. Under the new standard, disclosures are required to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. The Company adopted ASC Topic 842 effective April 1, 2022, using the modified retrospective transition approach as of the period of adoption.
The Company’s lease arrangements relate primarily to office space, a vehicle, and office equipment. The Company’s leases may include renewal options and rent escalation clauses. The Company is typically required to make fixed minimum rent payments relating to its right to use an underlying leased asset.
The Company has lease agreements which contain both lease and non-lease components, which it has not elected to account for as a single lease component. As such, minimum lease payments exclude fixed payments for non-lease components within a lease agreement, in addition to excluding variable lease payments not dependent on an index or rate, such as common area maintenance, operating expenses, utilities, or other costs that are subject to fluctuation from period to period.
ROU assets and lease liabilities are recognized at commencement date and determined using the present value of the future minimum lease payments over the lease term. The Company uses an incremental borrowing rate based on estimated rate of interest for collateralized borrowing since the Company’s leases do not include an implicit interest rate. The estimated incremental borrowing rate considers market data, actual lease economic environment, and actual lease term at commencement date. The lease term may include options to extend when it is reasonably certain that the Company will exercise that option. The Company recognizes lease expense on a straight-line basis over the lease term.
Warrant s
The Company accounts for warrants as either equity-classified or liability-classified instruments based on an assessment of the warrant’s specific terms and applicable authoritative guidance in ASC 480, Distinguishing Liabilities from Equity (“ASC 480”) and ASC 815, Derivatives and Hedging (“ASC 815”). The assessment considers whether the warrants are freestanding financial instruments pursuant to ASC 480, meet the definition of a liability pursuant to ASC 480, and whether the warrants meet all of the requirements for equity classification under ASC 815, including whether the warrants are indexed to the Company’s own common stock and whether the warrant holders could potentially require “net cash settlement” in a circumstance outside of the Company’s control, among other conditions for equity classification. This assessment, which requires the use of professional judgment, is conducted at the time of warrant issuance and as of each subsequent quarterly period end date while the warrants are outstanding.
| 12 |
ZRCN Inc.
CONDENSED NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED DECEMBER 31, 2023 AND 2022
For issued or modified warrants that meet all of the criteria for equity classification, the warrants are required to be recorded as a component of additional paid-in capital at the time of issuance. For issued or modified warrants that do not meet all the criteria for equity classification, the warrants are required to be liability classified and recorded at their initial fair value on the date of issuance and remeasured at fair value and each balance sheet date thereafter. Changes in the estimated fair value of the warrants are recognized as a non-cash gain or loss on the statements of operations. The fair value of the private placement warrants was estimated using a Black Scholes valuation approach with assumptions relevant on the date of issuance and the fair value of the penny warrants issued in connection with the Merger was estimated using the intrinsic value method.
Recently Issued Accounting Pronouncements
As an emerging growth company, the Company will have the option of adopting new accounting pronouncements on a delayed basis and has opted to take advantage of this option. As a result, the Company has been adopting new accounting standards based on the timeline for adoption afforded to privately held companies, unless it chooses to early adopt a new accounting standard.
Recently Issued Accounting Standards Adopted
In May 2021, the FASB issued ASU 2021-04, Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity Classified Written Call Options (“ASU 2021-04”), which introduces a new way for companies to account for warrants either as stock compensation or derivatives. Under the new guidance, if the modification does not change the instrument’s classification as equity, the Company accounts for the modification as an exchange of the original instrument for a new instrument. In general, if the fair value of the “new” instrument is greater than the fair value of the “original” instrument, the excess is recognized based on the substance of the transaction, as if the issuer has paid cash. The effective date of the standard is for interim and annual reporting periods beginning after December 15, 2021 for all entities, and early adoption is permitted. The Company adopted ASU 2021-04 effective April 1, 2023. There was no impact to its consolidated financial statements at the date of adoption.
In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers (“ASU 2021-08”), which addresses diversity in practice related to the accounting for revenue contracts with customers acquired in a business combination. Under the new guidance, the acquirer is required to apply Topic 606 to recognize and measure contract assets and contract liabilities in a business combination. The effective date of the standard is for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Company adopted ASU 2021-08 effective April 1, 2023. There was no impact to its consolidated financial statements at the date of adoption.
In June 2016, the FASB issued ASU No. 2016-13, Accounting for Credit Losses (Topic 326) (“ASU 2016-13”), which requires the use of an “expected loss” model on certain types of financial instruments. ASU 2016-13 also amends the impairment model for available-for-sale debt securities and requires estimated credit losses to be recorded as allowances instead of reductions to amortized cost of the securities. ASU 2016-13 is effective for annual periods beginning after December 15, 2022, including interim periods within those annual periods. Early adoption is permitted, including adoption in an interim period. The Company adopted ASU 2016-13 effective April 1, 2023 which did not have a material impact to its consolidated financial statements.
4. Merger with Harmony Energy Technologies Corporation
On April 14, 2023 (the “Closing Date”), Harmony closed the Merger with Zircon, as a result of which Zircon became a wholly-owned subsidiary of Harmony. While Harmony was the legal acquirer of Zircon in the Merger, for accounting purposes, the Merger is treated as a reverse recapitalization, whereby Zircon is deemed to be the accounting acquirer, and the historical financial statements of Zircon became the historical financial statements of Harmony (renamed ZRCN Inc.) upon the closing of the Merger. Under this method of accounting, Harmony was treated as the “acquired” company and Zircon is treated as the acquirer for financial reporting purposes.
Accordingly, for accounting purposes, the Merger was treated as the equivalent of Zircon issuing stock for the net assets of Harmony, accompanied by a recapitalization. The net assets of Harmony were stated at historical cost, with no goodwill or other intangible assets recorded.
| 13 |
ZRCN Inc.
CONDENSED NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED DECEMBER 31, 2023 AND 2022
As part of the Merger and reverse recapitalization, the Company assumed certain operating liabilities of Harmony, including certain payables due to vendors and employees, as well as notes payable to noteholders. In addition, Zircon and Harmony effectuated a share exchange whereby the shareholders of Zircon exchanged common shares representing % of the total outstanding shares of Zircon, for newly issued common shares of Harmony, or approximately % of the total outstanding shares of Harmony. Harmony shareholders thus retained common shares according to the terms of the merger. In connection with the Merger, the Company entered into a warrant exchange agreement, dated April 14, 2023 (the “Warrant Exchange Agreement”), with certain holders of the Company’s warrants under which such holders received shares of Common Stock in exchange for their warrants, bringing the total shares of the combined organization owned by Harmony’s pre-Merger shareholders to shares.
Zircon
agreed to pay the operating liabilities of Harmony, up to and including an aggregate of $
Zircon
paid transaction costs of $
The following table reconciles the elements of the Merger to the unaudited consolidated statements of changes in stockholders’ equity for the nine months ended December 31, 2023:
| Recapitalization | ||||
| Cash | $ |
|
||
| Non-cash net working capital assumed from Harmony |
(
|
) | ||
| Less: cash transaction costs and advisory fees allocated to ZRCN equity |
(
|
) | ||
| Effect of Merger, net of transaction costs | $ |
(
|
) | |
| Number of Shares | ||||
| Common stock of Harmony prior to Merger |
|
|||
| Shares issued for Warrant Exchange Agreement |
|
|||
| Common stock owned by Harmony’s pre-Merger shareholders |
|
|||
| Common stock issued in exchange for Zircon common stock |
|
|||
| Total shares of common stock immediately after Merger |
|
|||
Debt Settlement Agreement
In
connection with the Merger, the Company entered into debt settlement agreements (the “Debt Settlement Agreements”) with certain
third-party creditors of the Company under which the Company agreed to make certain payments over the next 12 months to the creditors
in satisfaction of an aggregate of $
| 14 |
ZRCN Inc.
CONDENSED NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED DECEMBER 31, 2023 AND 2022
5. Revenue
Disaggregation of Revenue from Contracts with Customers
Revenue disaggregated according to the timing of transfer of goods or services (e.g., at a point in time) for the three and nine months ended December 31, 2023 and 2022, were as follows:
| Revenue generated per major product line | For the Three Months Ended December 31, 2023 | For the Three Months Ended December 31, 2022 | For the Nine Months Ended December 31, 2023 | For the Nine Months Ended December 31, 2022 | ||||||||||||
| Stud sensor edge | $ |
|
$ |
|
$ |
|
$ |
|
||||||||
| Multifunctional scanners |
|
|
|
|
||||||||||||
| Stud sensor center |
|
|
|
|
||||||||||||
| Target control products |
|
|
|
|
||||||||||||
| Other |
|
|
|
|
||||||||||||
| Total Revenue | $ |
|
$ |
|
$ |
|
$ |
|
||||||||
Revenue disaggregated according to the geographical location of customers for the for the three and nine months ended December 31, 2023 and 2022, were as follows:
| Revenue by geographic location of customers | For the Three Months Ended December 31, 2023 | For the Three Months Ended December 31, 2022 | For the Nine Months Ended December 31, 2023 | For the Nine Months Ended December 31, 2022 | ||||||||||||
| United States | $ |
|
$ |
|
$ |
|
$ |
|
||||||||
| Canada |
|
|
|
|
||||||||||||
| Europe |
|
|
|
|
||||||||||||
| Japan |
|
|
|
|
||||||||||||
| UK |
|
|
|
|
||||||||||||
| Others |
|
|
|
|
||||||||||||
| Total Revenue | $ |
|
$ |
|
$ |
|
$ |
|
||||||||
6. Inventory
Inventory consisted of the following:
| December 31, 2023 | March 31, 2023 | |||||||
| Finished goods, net | $ |
|
$ |
|
||||
| Raw materials, net |
|
|
||||||
| Work in process, net |
|
|
||||||
| $ |
|
$ |
|
|||||
| 15 |
ZRCN Inc.
CONDENSED NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED DECEMBER 31, 2023 AND 2022
7. Property and Equipment
Property and equipment consisted of the following:
| December 31, 2023 | March 31, 2023 | |||||||
| Manufacturing equipment | $ |
|
$ |
|
||||
| Computer equipment |
|
|
||||||
| Leasehold improvements |
|
|
||||||
| Furniture and office equipment |
|
|
||||||
| Vehicles |
|
|
||||||
|
|
|
|||||||
| Construction in progress |
|
|
||||||
|
|
|
|||||||
| Less accumulated depreciation and amortization |
(
|
) |
(
|
) | ||||
| $ |
|
$ |
|
|||||
For
the three and nine months ended December 31, 2023, depreciation and amortization expense was $
Construction in progress consists of assets and technologies under development. The Company starts depreciation once the assets are completed and placed in service.
8. Intangible Assets
Acquired identifiable intangible assets are valued at the acquisition date primarily by using a discounted cash flow method.
The Company’s intangible assets consisted of the following:
| December 31, 2023 | March 31, 2023 | |||||||||||||||||||||||
| Finite-lived intangible assets (1): | Intangibles, Gross | Accumulated Amortization | Intangibles, Net | Intangibles, Gross | Accumulated Amortization | Intangibles, Net | ||||||||||||||||||
| Patents issued and pending | $ |
|
$ |
(
|
) | $ |
|
$ |
|
$ |
(
|
) | $ |
|
||||||||||
| Exclusivity rights and licenses |
|
(
|
) |
|
|
(
|
) |
|
||||||||||||||||
| Total finite-lived intangible assets | $ |
|
$ |
(
|
) | $ |
|
$ |
|
$ |
(
|
) | $ |
|
||||||||||
| Finite-lived intangible assets (1): |
2023 Weighted Average Life Remaining |
|||
| Patents issued and pending |
|
|||
| Exclusivity rights and licenses |
|
|||
| (1) |
|
For
the three and nine months ended December 31, 2023 the amortization expense of intangible assets amounted to $
The Company evaluates intangible assets quarterly for impairment and writes off assets that are not used in any products.
| 16 |
ZRCN Inc.
CONDENSED NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED DECEMBER 31, 2023 AND 2022
Expected future amortization expense of acquired finite-lived intangible assets as of December 31, 2023 is as follows:
| For the Years Ending March 31, | Amount | |||
| Remainder of fiscal 2024 | $ |
|
||
| 2025 |
|
|||
| 2026 |
|
|||
| 2027 |
|
|||
| 2028 |
|
|||
| Thereafter |
|
|||
| $ |
|
|||
9. Accrued Expenses
Accrued expenses consisted of the following:
| December 31, 2023 | March 31, 2023 | |||||||
| Rebates | $ |
|
$ |
|
||||
| Vacation |
|
|
||||||
| Payroll and related |
|
|
||||||
| Sales expense |
|
|
||||||
| Professional services |
|
|
||||||
| Advertising allowance |
|
|
||||||
| Interest |
|
|
||||||
| Accrued taxes |
|
|
||||||
| $ |
|
$ |
|
|||||
10. Debt
Line of Credit
The
Company has a revolving line of credit with a bank, which allows borrowings up to $
While
the line of credit has a maximum limit of $
On
November 8, 2023, Zircon Corporation, a subsidiary of ZRCN Inc., entered into an amendment (the “Amendment”) to the Loan
Agreement, dated as of January 23, 2023, and the related Commercial Promissory Note (the “Base Rate”) dated January 27, 2023
in the original principal amount of $
| 17 |
ZRCN Inc.
CONDENSED NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED DECEMBER 31, 2023 AND 2022
Pursuant
to the Amendment, the Bank waived Zircon’s existing defaults under the Loan Agreement for its failure to comply with certain covenants
set forth in the Loan Agreement as the result of, without limitation, Zircon’s reverse merger with the Company. In addition, the
Pursuant
to the Amendment, while the line of credit has a maximum limit of $
On February 13, 2023, the company entered a second amendment to the Loan Agreement, dated as of January 23, 2023, whereby U.S. Bank National Association (the “Bank”), as successor in interest to Union Bank, N.A. agreed to extend the maturity date of the Loan Agreement to July 31, 2024.
For
the three and nine months ended December 31, 2023, interest expense on the line of credit totaled $
The components of the revolving line of credit consisted of the following:
| December 31, 2023 | March 31, 2023 | |||||||
| SOFR | $ |
|
$ |
|
||||
| Excess of SOFR |
|
|
||||||
| $ |
|
$ |
|
|||||
Notes payable - bank
In
July 2018, the Company entered into a term loan with a bank for $
In
September 2019, the Company entered into a term loan with a bank for $
For
the three and nine months ended December 31, 2023, interest expense on notes payable with banks totaled $
| 18 |
ZRCN Inc.
CONDENSED NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED DECEMBER 31, 2023 AND 2022
The table below details the activity related to the Notes payable - bank:
| July 2018 Note | September 2019 Note | Harmony Notes | Total | |||||||||||||
| Balance, March 31, 2023 | $ |
|
$ |
|
$ | $ |
|
|||||||||
| Issuances |
|
|
||||||||||||||
| Repayments |
(
|
) |
(
|
) |
(
|
) |
(
|
) | ||||||||
| Balance, June 30, 2023 |
|
|
|
|
||||||||||||
| Plus: accrued interest |
|
|
|
|||||||||||||
| Total balance, June 30, 2023 | $ |
|
$ |
|
$ |
|
$ |
|
||||||||
| Plus: accrued interest |
(
|
) |
|
|
||||||||||||
| Repayments |
(
|
) |
(
|
) |
(
|
) |
(
|
) | ||||||||
| Total balance, September 30, 2023 | $ |
|
$ |
|
$ |
|
$ |
|
||||||||
| Plus: accrued interest |
|
|
|
|||||||||||||
| Repayments |
(
|
) |
(
|
) | ||||||||||||
| Total balance, December 31, 2023 | $ |
|
$ |
|
$ |
|
$ |
|
||||||||
| Less: accrued interest |
(
|
) |
(
|
) |
(
|
) |
(
|
) | ||||||||
| Total principal balance, December 31, 2023 | $ | $ |
|
$ |
|
$ |
|
|||||||||
Future scheduled maturities of notes payable - bank are as follows:
| For the Period Ending December 31, | Amount | |||
| Remainder of fiscal 2024 | $ |
|
||
| $ |
|
|||
| Notes payable, current portion | $ |
|
||
Notes payable to Stauss Family Administrative Trust
The
Company has notes payable to the Stauss Family Administrative Trust to repay loans made to the Company. As of December 31, 2023, principal
balance of $
For
the three and nine months ended December 31, 2023 the interest expense on notes payable to the Stauss Family Administrative Trust totaled
$
Loan Repayment
Section 13(k) of the Exchange Act provides that it is unlawful for a company, such as ours, that has a class of securities registered under Section 12 of the Exchange Act to, directly or indirectly, including through any subsidiary, extend or maintain credit in the form of a personal loan to or for any director or executive officer of the Company. In March 2022, Zircon Corporation, the Company’s wholly-owned subsidiary, loaned our chief executive officer funds to pay certain tax obligations, which was still outstanding when we acquired Zircon in April 2023, which may have violated Section 13(k) of the Exchange Act as a result of the transition from private to public company accounting. The loan was repaid in August 2023 as soon as management became aware of the possible violation. The loan repayment was made by means of an offset to beneficial amounts of our chief executive officer in certain loans to the Company to which offset he did not object. Issuers that are found to have violated Section 13(k) of the Exchange Act may be subject to civil sanctions, including injunctive remedies and monetary penalties, as well as criminal sanctions. In accordance with ASC 450, Contingencies , no amounts have been accrued for a loss contingency as it is not estimable as of December 31, 2023. The imposition of any of such sanctions on us could have a material adverse effect on our business, financial position, results of operations or cash flows.
| 19 |
ZRCN Inc.
CONDENSED NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED DECEMBER 31, 2023 AND 2022
11. Warrants
At
the closing of the Merger, the Company issued certain consultants and advisors warrants to purchase an aggregate of
The following table provides the activity for all warrants for the three and nine months ended December 31, 2023:
| Total Warrants |
Weighted Average Remaining Term |
Weighted Average Exercise Price |
||||||||||
| Outstanding as of March 31, 2023 | — | $ | ||||||||||
| Issued |
|
|
$ |
|
||||||||
| Outstanding as of December 31, 2023 |
|
|
$ |
|
||||||||
12. Commitments and Contingencies
Legal Proceedings
ZRCN is engaged in procedures to protect its proprietary rights and has filed complaints with the Federal Trade Commission and the Customs and Border Patrol.
Zircon Corporation v. Stanley Black & Decker, Inc.
Zircon is Appellant from an adverse ruling by the International Trade Commission (“ITC”) in an investigation before the ITC in which Zircon sought an injunction to prevent Stanley, Black & Decker, Inc. and its wholly owned subsidiary, Black & Decker (U.S.), Inc. (together “SBD”) from importing and selling in the United States certain products alleged by Zircon to infringe its patents. The appeal was initiated by Zircon following the ruling by the ITC overturning the decision by Judge Charles Bullock, Presiding Judge of the ITC issued on October 7, 2021, finding that three patents at issue in the investigation were both valid and practiced by Zircon and that SBD infringed Zircon’s auto recalibration patent. The Commission found that while Zircon’s auto recalibration patent met all objective requirements for validity, it reversed the Presiding Judge on the subjective requirement of non-obviousness. Zircon then timely appealed to the Federal Circuit Court of Appeal (“FCCA”) and the matter was heard de novo before the FCCA on January 9, 2024 . A ruling is expected within 90 days of the hearing date. Zircon is also plaintiff in a Federal District Court action in the Northern District of California against SBD, which is on stay pending the disposition of the ITC matter in the FCCA. The ITC is not a forum for damages, only an exclusion order. However, a reversal of the ITC finding will enable Zircon to proceed with its damages action claim in the Northern District case. All charges in connection with the litigation versus SBD have been expensed to date and no damage claim has been filed against Zircon in this matter.
Morgenthaler, et al. v. Zircon, et al.
The company was one of more than twenty (20) defendants named in a suit filed in Los Angeles County, California Superior Court on behalf of three family members injured in an accident between an automobile and a truck and trailer. The accident occurred in May 2017 and the Complaint was filed on December 1, 2017. The company, represented in the case by insurance defense lawyers selected and paid for by the company’s liability insurance carrier, The Travelers Indemnity Company, had no direct or indirect involvement in the accident and had no goods on the truck at the time of the accident. The company argued that it was neither the cause in fact nor the proximate cause of the accident or of the damages suffered by the Plaintiffs, and filed a Motion for Summary Judgement. The trial court judge found that there were “…no triable issues of fact, and that the moving party, Defendant Zircon Corporation, is entitled to judgement as a matter of law…”. The Order on the Motion was entered on May 23, 2022 and the Plaintiffs appealed. On January 30, 2024 the California Second District Court of Appeal affirmed the trial court’s Summary Judgement in favor of Zircon. In accordance with ASC 450, Contingencies, no amounts were accrued for a loss contingency as it was neither probable nor estimable as of December 31, 2023.
| 20 |
ZRCN Inc.
CONDENSED NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED DECEMBER 31, 2023 AND 2022
Leases
The
Company’s corporate headquarters in Campbell, California are leased from the trust of one of its former stockholders for approximately
$
per month under a lease expiring in December 2027. The lease requires the Company to pay utilities, maintenance and real estate
taxes. Rent expense was $
The
Company leases office equipment through a lease that expires in June 2026 and requires monthly lease payments of $
The
Company leases a vehicle through a lease that expires in July 2024 and requires monthly lease payments of $
| December 31, 2023 | ||||
| Assets: | ||||
| Operating lease right-of-use assets, net | $ |
|
||
| Liabilities | ||||
| Current liabilities: | ||||
| Operating lease liability, current |
|
|||
| Noncurrent liabilities: | ||||
| Operating lease liability, net of current portion |
|
|||
| Total operating lease liabilities | $ |
|
||
The components of lease expense, which are included in selling, general and administrative expense, are as follows:
| December 31, 2023 | ||||
| Components of lease cost: | ||||
| Operating lease expense | $ |
|
||
| Total lease cost | $ |
|
||
| December 31, 2023 | ||||
| Weighted-average remaining lease term: | ||||
| Operating leases (in years) |
|
|||
| December 31, 2023 | ||||
| Weighted-average remaining discount rate: | ||||
| Operating leases |
|
% | ||
| 21 |
ZRCN Inc.
CONDENSED NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED DECEMBER 31, 2023 AND 2022
Future minimum lease payment under non-cancellable lease as of December 31, 2023 are as follows:
| Maturities of lease liabilities | Operating Leases | |||
| Year ending March 31, | ||||
| Remainder of fiscal 2024 | $ |
|
||
| 2025 |
|
|||
| 2026 |
|
|||
| 2027 |
|
|||
| 2028 and thereafter |
|
|||
| Total Minimum Lease Payments |
|
|||
| Less effects of discounting |
(
|
) | ||
| Present value of future minimum lease liabilities |
|
|||
| Less current portion of operating lease liability |
(
|
) | ||
| Operating lease liability, net of current portion | $ |
|
||
13. Profit Sharing and 401(k) Plan
The Company has a defined contribution profit sharing plan for all eligible employees. Contributions to the profit sharing plan are determined annually by the Board of Directors. There were no profit sharing contributions made during the three and nine months ended December 31, 2023 and 2022.
All
eligible employees are also allowed to participate in the Company’s 401(k) plan. The Company’s contributions to the plan
are based on a specified percentage of each participant’s eligible contribution, decided annually by the Board of Directors, as
defined in the plan document. The Company’s contributions of $
14. Subsequent Events
On January 30, 2024 the California Second District Court of Appeal affirmed the trial court’s Summary Judgement in favor of Zircon. In accordance with ASC 450, Contingencies, no amounts were accrued for a loss contingency as it was neither probable nor estimable as of December 31, 2023.
Management has determined the best interest of the corporation is to replace the existing loan with an increased credit facility. The matter has been discussed with our current lender, US Bank. Several other lenders are negotiating with the Company to provide a credit facility that supports manufacturing and development consistent with its proposed business plans.
On February 13, 2024, the Company signed an agreement with U.S. Bank to
extend the maturity date on its line of credit from
| 22 |
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
The following management discussion and analysis of the financial position and results of operations (“MD&A”) should be read in conjunction with the audited consolidated financial statements and related notes to the financial statements included elsewhere in this Report. This discussion contains forward-looking statements that relate to future events or our future financial performance. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. These risks and other factors include, among others, those listed under “Forward-Looking Statements” and “Risk Factors” and those included elsewhere in this report.
OVERVIEW
Zircon is a Silicon Valley-based company operating in Northern California since 1977. leveraging its proprietary sensor-based technology across a mix of global markets, including commercial and residential buildings, government infrastructure and building information modeling. Zircon is focused on creating new, technical solutions for global applications in the areas of home and workplace safety, project efficiency, and structural data analysis.
Zircon benefits from a multi-generational customer base of professional contractors and do-it-yourselfers who rely on Zircon’s innovative and easy-to-use products to get the job done.
RESULTS OF OPERATIONS
During the quarter ended December 31, 2023, and the year, Zircon’s selected financial information is the following. All the data are presented in United States dollars.
Financial Position Analysis
The information presented as of December 31 and for the past one (1) year represents the consolidated information of ZRCN Inc.
| As of | ||||||||
| December 31, 2023 | March 31, 2023 | |||||||
| Assets | $ | 26,870,586 | $ | 24,942,433 | ||||
| Liabilities | $ | 17,834,217 | $ | 15,115,542 | ||||
| Equity | $ | 9,036,369 | $ | 9,826,891 | ||||
Assets
The total assets on December 31, 2023, were $26.9M compared to $24.9M on March 31, 2023, an increase of $2.0M. Cash increased by $1.6M. Accounts receivable decreased by $0.2M and inventory increased by $0.8M. Net Property and Equipment increased by $0.1M and prepaid and other assets decreased by $0.2M. Operating right of use assets, tax deposits and intangible assets decreased by $0.2M.
Liabilities
Total liabilities on December 31, 2023, were $17.8M and $15.1M on March 31, 2023, an increase of $2.7M. During the period, the balance on the bank line of credit increased by $2.2M while accounts payable and accrued expenses increased by $1.0M. Notes payable and operating lease liabilities declined by $0.3M.
| 23 |
Equity
Total equity on December 31, 2023, was $9.0M compared to $9.8M on March 31, 2023, a decrease of $0.8M.
When an “S” Corporation, Zircon reported all its net income proportionally to each shareholder on an IRS form K-1. Each individual shareholder was then required to report the respective share of such income shown on such shareholder’s K-1 and pay the related income taxes on such shareholder’s individual tax return. Distributions to cover the resulting income taxes are made in the following calendar year. Zircon made such distributions to the shareholders for their respective tax payments on their allocated portion of the S corporation net income. Tax related distributions for fiscal 2021, income were made to Zircon’s shareholders on their respective shares of net income in the amount of $223K in April 2022. Tax related distributions for fiscal 2022 net income were paid in October 2023 in the amount of $153K. Zircon has not yet prepared the tax returns for the fiscal year ending March 31, 2023. Zircon will also be required to make a tax related distribution to the March 31, 2023, “S” shareholders in April 2024.
Operating Results Analysis
|
For the Three Months Ended
December 31, |
For the Nine Months Ended
December 31, |
|||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Net sales | $ | 7,539,389 | $ | 7,859,564 | $ | 23,368,147 | $ | 22,668,134 | ||||||||
| Cost of sales | 4,485,237 | 4,698,944 | 12,980,027 | 13,526,950 | ||||||||||||
| Gross profit | 3,054,152 | 3,160,620 | 10,388,120 | 9,141,184 | ||||||||||||
| Operating expenses: | ||||||||||||||||
| General and administrative | 1,509,814 | 1,122,706 | 4,899,081 | 3,931,421 | ||||||||||||
| Marketing and selling | 1,175,449 | 1,239,230 | 3,350,846 | 3,367,962 | ||||||||||||
| Research and development | 465,029 | 471,102 | 1,453,286 | 1,418,181 | ||||||||||||
| Total operating expenses | 3,150,292 | 2,833,038 | 9,703,213 | 8,717,564 | ||||||||||||
| Income from operations | (96,140 | ) | 327,582 | 684,907 | 423,620 | |||||||||||
| Other expenses: | ||||||||||||||||
| Interest expense | 229,311 | 149,785 | 562,080 | 312,689 | ||||||||||||
| Other expenses | 10,856 | 6,782 | 30,291 | 20,351 | ||||||||||||
| (Gain) loss on foreign currency transactions | 52,194 | 82,350 | 58,956 | 85,619 | ||||||||||||
| Total other expenses | 292,361 | 238,917 | 651,327 | 418,659 | ||||||||||||
| Income (loss) before income taxes | (388,501 | ) | 88,665 | 33,580 | 4,961 | |||||||||||
| Income tax expense | (23,092 | ) | (14,657 | ) | (55,929 | ) | (117,191 | ) | ||||||||
| Net income (loss) | (411,593 | ) | 74,008 | (22,349 | ) | (112,230 | ) | |||||||||
| Less: Net (loss) income attributable to non-controlling interests | 67,430 | (11,629 | ) | (28,163 | ) | 142,629 | ||||||||||
| Net income (loss) attributable to common stockholders | $ | (479,023 | ) | $ | 85,637 | $ | 5,814 | $ | (254,859 | ) | ||||||
Sales revenue and gross margin
Zircon generated $7.5M in revenue during the quarter ended December 31, 2023. Zircon generated $7.9 in revenue during the quarter ended December 31, 2022, a decrease of 4%. For the nine-month period ended December 30, 2023, revenue increased to $23.4M from $22.7M, a 3% increase over the same period last year.
| 24 |
Research and development
For the quarters ended December 31, 2023 and 2022, Zircon incurred R&D expenditures of $465K and $471K respectively. For the nine-month periods ending December 31, 2023 and 2022, spending was $1.5M and $1.4M, respectively including, the salaries of researchers and development materials. The difference of $64K between the corresponding periods is the result of the increased salaries in product development..
Administrative expenses
For the quarters ended December 31, 2023, and 2022 respectively, total General & Administrative expenditures were $1.5M and $1.1M. For the nine-month periods ending December 31, 2023 and 2022 total G & A spending was $4.9M and $3.9M respectively. Much of the increase is related to legal and consulting expenses related to completing the reverse merger.
Marketing and Selling expenses.
Spending on marketing and selling declined by $64K in the quarter ended December 31, 2023, when compared to the same quarter last year. The company spent $1.2M this year versus $1.2M in the prior year for the three months. Over the course of the nine months ended December 31, 2023 and 2022, respectively spending was $3.4M and $3.4M.
Stock based compensation.
During the nine-month periods ended December 31, 2023, and 2022, Zircon did not have any stock-based compensation.
Financial expenses
On January 23, 2023, Zircon completed its annual renewal and amended its line of Credit with Union Bank of California. The collateral-based line of credit is secured by accounts receivable, inventory and other assets giving Zircon $12M in maximum borrowing capacity. At the end of the nine-month period ended on December 31, 2023, Zircon had a line balance of $9.4M. On March 31, 2023, the line balance was $7.2M. The line will be due or up for annual renewal on February 29, 2024.
Interest on the line of credit is based on an annual interest rate of 2.36% in excess of the Daily Simple Secured Overnight Financing Rate (SOFR). As of December 31, 2023, SOFR was 8.5% while on December 31, 2022, SOFR was at 7.0%. For the three and nine months ended December 31, 2023, interest expense on the line of credit totaled $229K and $562K. For the three and nine months ended December 31, 2022, interest expense on the line of credit totaled $150K and $313K, respectively.
Zircon has notes payable to the Stauss Family Administrative Trust to repay loans made to Zircon. The principal balance of $667K is due and payable in December 2024. Interest accrued at 5.5% per annum is paid quarterly and included in accrued expenses. The note is subordinated to the line of credit payable to the bank and no payment is to be made on the note without prior approval from the bank.
For the three and nine months ended December 31, 2023, the interest expense on notes payable to the Stauss Family Administrative Trust totaled $6,002 and $32,372, respectively. For the three and nine months ended December 31, 2022, the interest expense on notes payable to the Stauss Family Administrative Trust totaled $12,754 and $38,124, respectively.
Comprehensive Income (Loss)
Comprehensive income (loss) of all periods presented is comprised primarily of net income (loss) and foreign currency translation adjustments. Foreign currency gains we ($11K) and $89K for the three and nine months ended December 31, 2023. For the three and nine months ended December 31, 2022, foreign currency losses were ($45K) and ($49K).
| 25 |
Cash Flow Analysis
|
For The Nine Month Period Ended December 30, |
||||||||
| 2023 | 2022 | |||||||
| Operating activities | $ | 1,229,903 | $ | 1,439,482 | ||||
| Investing activities | (1,214,561 | ) | (495,817 | ) | ||||
| Financing activities | 1,571,622 | (74,186 | ) | |||||
| Effect of exchange rate fluctuation | 3,651 | (2,926 | ) | |||||
| Net increase (decrease) in cash | $ | 1,590,615 | $ | 866,553 | ||||
Operating Activities
During the nine-month period ended December 31, 2023, Zircon generated $1.2M in cash in from operations. Depreciation and amortization added back $0.6M in cash. Decreases in accounts receivable contributed $0.4M and an increase in inventory consumed $0.7M. Increases in accounts payable and changes in other current liabilities added $0.9M and $0.1M in cash respectively.
Investing Activities
The reverse merger with Harmony Energy consumed $0.5M of cash. The addition of PP&E consumed $0.6M and investments in patents consumed $0.1M.
Financing Activities
On January 23, 2023, Zircon renewed and amended its line of Credit with MUFG Union Bank. The collateral-based line of credit is secured by accounts receivable, inventory and other assets giving Zircon $12M in maximum borrowing capacity. As of December 31, 2023 the line balance was $10.9M, a decrease of $4M from the year ending March 31, 2023.
Liquidity, Capital Resources and Sources of Financing
As of December 31, 2023, the Company had $1,619,630 cash and working capital of $6,644,700. To date, ZRCN has been financed primarily through retained earnings and secured loans. The loans are secured by accounts receivable, inventory and fixed assets. The Company believes that it has sufficient liquidity to fund its operations and operating capital needs for the next 12 months as well as meet its obligations as they become due in 2023 and 2024.
Information on Outstanding Securities
The following table sets out the number of common shares and warrants outstanding as of the date hereof:
| Information on Outstanding Securities | ||||
| Common shares issued and outstanding | 9,948,272 | |||
| Potential issuance of common shares | ||||
| Warrants | 217,184 | |||
| Stock options | - | |||
| Fully diluted shares | 10,165,456 | |||
Related Party Transactions
| Zircon is a member of a controlled group of companies and has revenue and cost-sharing activities with other members of the controlled group. Results of operations and financial condition may not represent amounts that would have been reported if Zircon operated as an unaffiliated entity. |
| 26 |
| Zircon has an exclusive manufacturing and technical assistance agreement with Zircon de Mexico S.A. de C.V. (the “Contractor”), an entity which is owned by certain shareholders of Zircon. Under the terms of the agreement, Zircon provides materials, technical assistance, and expertise to the Contractor, and the Contractor assembles certain of Zircon’s products. | |
| In September 2017, an affiliated company, Zircon Corporation Limited, was established in the United Kingdom to facilitate the sale of Zircon’s products to European customers and operations began during the year ended March 31, 2019. The ownership structure of the affiliate is similar to the ownership of Zircon. |
Off-Balance Sheet Arrangements
ZRCN has no off-balance sheet arrangements.
Estimates, Judgments and Assumptions
ZRCN prepares its financial statements in accordance with US GAAP, which require management to make estimates and assumptions that affect the amounts of its assets and liabilities, the information provided with regard to future assets and liabilities as well as the amounts of revenues and expenses for the relevant periods. Readers are invited to refer the Note 2 of the financial statements for the period ending December 31, 2023, for details.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate and Foreign Currency Risk
Interest Rate Risk
ZRCN’s exposure to changes in interest rates relates primarily to Zircon’s cash, cash equivalents and outstanding debts.
Foreign Currency & Exchange Risk
ZRCN sources parts from foreign vendors and sells its products in various foreign markets around the world. Changes in foreign currency exchange for the purchase of components from vendors and the sale of products in foreign markets can have a material impact on the Company’s results of operations and liquidity. The Company hedge or take other steps to mitigate the impact from foreign currency exchange rates, but there is no guarantee that these efforts will be successful in every instance.
Controls and Procedures
As required by Rule 13a-15 under the Exchange Act, our management has carried out an evaluation, with the participation and under the supervision of our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2023. Disclosure controls and procedures refer to controls and other procedures designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating and implementing possible controls and procedures.
| 27 |
Material Weakness in Internal Control Over Financial Reporting
Management conducted its evaluation of disclosure controls and procedures under the supervision of our chief executive officer and our chief financial officer. Based upon, and as of the date of this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were ineffective as of December 31, 2023 due to the following material weaknesses that our management identified in our internal control over financial reporting as of September 30, 2023:
| 1. | We do not have an Audit Committee — While not being legally obligated to have an audit committee, it is the management’s view that such a committee, including a financial expert member, is an utmost important entity level control over the Company’s financial statement. Currently the Board of Directors acts in the capacity of the Audit Committee and does not include a member that is considered to be independent of management to provide the necessary oversight over management’s activities. | |
| 2. | We did not have internal accounting personnel who possess PCAOB knowledge and working experience as employees or as outside independent or paid consultants during the entire periods leading up to December 31, 2023. |
Management has evaluated, and continues to evaluate, avenues for mitigating our internal controls weaknesses, and will continue to employ contract personnel and PCAOB accountants. Management expects to continue to use reasonable care in following and seeking improvements to effective internal control processes that have been and continue to be in use at the Company, especially through the employment PCAOC qualified and experienced accountants.
We have taken steps to remediate this material weaknesses as soon as practicable by implementing a plan to improve our internal control over financial reporting including, but not limited to, hiring additional staff who have PCAOB knowledge and working experience and/or maintaining outside consultants experienced in PCAOB financial reporting as well as in SEC reporting requirements. Our management team will continue to monitor and evaluate the effectiveness of our internal controls and procedures and our internal controls over financial reporting on an ongoing basis and is committed to taking further action and implementing additional enhancements or improvements.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
The Company is engaged in legal proceedings in the normal course of its business operations. Information regarding current Legal Proceedings, appears in Part I - “Legal Proceedings” of our 2023 Form 8K/A filed with the Securities and Exchange Commission on August 22, 2023. There have been no material changes from the disclosures set forth in our August 22, 2023, Form 8-K/A.
Item 1A. Risk Factors
Information regarding the primary risks and uncertainties that could materially and adversely affect our future performance or could cause actual results to differ materially from those expressed or implied in our forward-looking statements, appears in Part I, Item 1A - “Risk Factors” of our 2023 Form 8K/A filed with the Securities and Exchange Commission on August 22, 2023. There have been no material changes from the risk factors set forth in our August 22, 2023, Form 8-K/A
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
We have not made any sales of unregistered securities of our common stock during the period from April 1, 2023, through December 31, 2023.
Item 3. Defaults Upon Senior Securities
Not applicable.
| 28 |
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
During
the last fiscal quarter, none of our directors or officers (as defined in Rule 16a-1(f) of the Exchange Act)
Item 6. Exhibits
| 29 |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| ZRCN INC. | ||
| Date: February 20, 2024 | By: | /s/ John Stauss |
| Name: | John Stauss | |
| Title: | Chairman and Chief Executive Officer | |
| Date: February 20, 2024 | By: | /s/ Ronald Bourque |
| Name: | Ronald Bourque | |
| Title: | Chief Financial Officer and Director | |
| 30 |